19 April 2021
Just like any afflicted person, a pandemic-stricken nation needs some form of recovery. Economic activity is at historic lows, unemployment figures are daunting, and businesses are struggling to keep their doors open. Unprecedented times call for equally drastic legislation, and what weapon would be more fitting to be wielded other than the awesome power of taxation.
The theme of recovery was discussed in the previous A Dose of Law articles, detailing the reduction of corporate income tax rates and introduction of additional VAT exemptions, to name a few. In this article, which is the third in the series, the balance is struck by CREATE Act by giving the government the much-needed recovery by limiting and centralizing incentives.
Before CREATE Act, there were multiple tax incentives granted to registered business enterprises (RBE) under different investment promotion agencies (IPA) as established by various special legislation. For instance, the RBEs under the Philippine Economic Zone Authority (PEZA) enjoy different tax incentives than those registered with the Board of Investments (BOI) or the Subic Bay Metropolitan Authority (SBMA).
This is changed by CREATE. In its objective of “developing a more responsive and globally-competitive tax incentives regime that is performance-based, targeted, time-bound, and transparent,” the Congress centralized tax incentives under a newly inserted Title of the Tax Code. Accordingly, the tax incentives that will be provided to RBEs, regardless of the IPA with which they have registered, are now uniform.
The first three tax incentives are the income tax holiday (ITH), special corporate income tax, and the enhanced deduction.
The ITH incentive speaks for itself: the RBE will not be subject to income tax during the period of entitlement. The period of entitlement of ITH is four to seven years, depending on two factors: location of the RBE and the tier classification of the registered activity of the RBE.
CREATE intends to “create a more equitable tax incentive system that will allow for inclusive growth and generation of jobs and opportunities in all the regions of the country and ensure access and ease in the grant of these incentives especially for applicants in least developed areas.” By way of encouragement to spur employment and economic activity away from congested urban areas, the period of ITH for those operating outside of metropolitan areas is a minimum of six years, as distinguished from those locating in Metro Manila which will enjoy ITH for a period as short as four years, and for those in other metropolitan areas and areas adjacent to Metro Manila for a period as short as five years.
The registered activity of the RBE may likewise fall into one of three tiers, with those that involve generation of new knowledge and intellectual property registered and/or licensed in the Philippines, commercialization of patents, and highly technical manufacturing, among others, fitting in the highest tier which the law designates as Tier III. RBEs doing Tier III activities will enjoy ITH for six to seven years. Tier II activities, on the other hand, include activities that produce supplies, parts and components, and intermediate services that are not locally produced but are critical to industrial development and import-substituting activities, including crude oil refining. RBEs doing Tier II activities will enjoy ITH for five to seven years. Finally, those doing Tier I activities, i.e., the lowest tier, will enjoy ITH for only four to six years.
On certain grounds, the period of entitlement to income tax holiday may be extended. For instance, if the RBE will be located in areas recovering from armed conflict or a major disaster as determined by the Office of the President, an additional two years of income tax holiday shall be granted. In cases of complete relocation from NCR, an additional three years of income tax holiday is in order for the enterprise.
Once the period of ITH, an export enterprise may choose to be subjected to the special corporate income tax rate or to be entitled to claim enhanced deductions. However, for domestic market enterprises, the option to avail of the special corporate income tax rate is not available. Both the special corporate income tax and enhanced deductions will be discussed in the fourth and last article in the series.
First published on The Daily Tribune.
For further information, please contact:
Nilo T. Divina, Managing Partner, DivinaLaw
nilo.divina@divinalaw.com
